After the shutdown, soft earnings look like new normal

What's next for stocks? The market is down this morning as traders and strategists are trying to figure out where the market will go for the rest of the quarter and into 2014.

I can give you the short take on the (bullish) consensus: Stocks will dip in the next three weeks as earnings warnings for the fourth quarter come in more aggressive than expected. The issue is whether overall earnings growth slows--which the market can handle--or goes to zero or negative (to which the market will react very negatively).

Most traders I talk to are eager to buy after the market drops, say, five percent in the next three weeks and most believe we will rally modestly going into the end of the year.

But there is a lot of concern about the damage done from the shutdown. Without the shutdown we might have had a slow grind higher in the economy, and a chance that tapering would have begun, perhaps in October but almost certainly in December. All that is out now. The trajectory of growth now flattens out a bit more (S&P said the shutdown cost the U.S. economy 0.6 percent of GDP), and it may also change what we can expect for 2014 growth as well.

And remember, next year is midterm elections, which means politicians will be sitting on their hands and not doing what they need to do. That also means more ambiguous fiscal policies, and that businesses will still be uncertain about fiscal and monetary policy. So instead of analysts thinking S&P earnings for 2014 will be, say, $115, they will likely take it down to $110 or so, which is where 2013 is expected to end now.

In other words, expect flat earnings growth for 2014.

So take the combination of, first, nothing has changed, and second, that there may be additional drag on growth in 2014, and you have strategists really scrambling to come up with the right scenario for stocks in 2014. That is what the markets may be reacting to this morning.

Companies are using this confusion to take down Q4 estimates, perhaps more aggressively than traders thought. Take EBay, which warned that profit and revenues would be below expectations this quarter.

On the conference call, EBay execs talked about a "rapid deceleration" in Q3 and that "we haven't really seen any more positive signs in October than what we experienced through the later part of the third quarter in the U.S. So all of that, and all the anxiety we see when we pick up the newspaper everyday, makes us fairly cautious about how we look at the holiday season."

In other words, they're not exactly sure what happened, but the government shutdown was part of it.